Senior U.S. Republican to target state, local tax deduction

WASHINGTON (Reuters) - The U.S. Congress' top Republican on tax policy is drawing up a plan to rewrite the tax code and is likely to recommend repeal of a popular and costly federal tax deduction for state and local taxes paid, congressional aides said.

House of Representatives Ways and Means Committee Chairman Dave Camp, who is expected to unveil his plan soon, is pushing forward with the idea of a tax code overhaul despite expectations that this Congress is too fractured to take on such a big project.

The provision, available only to the roughly one-third of federal taxpayers who itemize, allows taxpayers to deduct from their income the value of state and local property tax paid, as well as state and local income or sales tax paid.

Claimed by 46.6 million Americans in 2011, the deduction reduced U.S. tax revenues that year by an estimated $42 billion, making it one of the largest tax breaks in the code.

With lawmakers faced off across a deep partisan fiscal divide, Camp's determination to proceed reflects a personal conviction that the tax code badly needs work.

Future discussions on tax policy could begin with the plan Camp hatches and the lawmaker has said nothing is off-limits.

"Everything is on the table means everything is on the table," said Michelle Dimarob, a committee spokesperson.

Several bipartisan deficit-cutting panels have urged repeal of the deduction for state and local taxes paid, including the Simpson-Bowles commission appointed by President Barack Obama and Congress. "It is hard to go into (tax) reform and not go there," a top Senate Republican tax aide said.

The deduction will be significantly curtailed or axed in any proposal put forward by Camp, said an aide who works for him.

PAYING FOR LOWER RATES

Camp, like most Republicans, wants to slash tax rates. The cuts he envisions would sharply reduce U.S. tax revenues. Those reductions would have to be offset, at least in part, by new revenues, which could be found by ending some tax breaks.

The one for payment of state and local taxes tends to disproportionately benefit wealthy people in Democratic stronghold states. More than 30 percent of the total value of the deduction in 2011 was claimed by New Yorkers and Californians, according to congressional estimates.

If he targets the deduction, Camp will face stiff opposition from Democrats who control the Senate.

Lobbyists, particularly those for state and local governments, are not letting their guard down either.

Repealing the deduction "would fundamentally change a basic tenet of federalism in the United States - the notion that different levels of government don't tax each other," said Lars Etzkorn, a lobbyist with the National League of Cities.